CHAPTER 5

FINANCIAL INSTRUMENTS FRAMEWORK

PAS 32, PFRS 7, PFRS 9 (July 2014)
Mandatory effective date
on and after Jan. 1, 2018
PAS 32 FINANCIAL INSTRUMENTS: PRESENTATION
PAS 32 defines a financial instrument as any contract that gives rise to a financial asset of one entity
and a financial liability or equity of another equity.
Characteristics
1. There exists a contract
2. Involves two parties
3. Gives rise to a financial asset of one party, a financial liability/ equity of the other.
Termski
Favorable- when exchanges result to gain or additional cash flows
Unfavorable- when exchanges result to cash outflow

Financial Assets Nonfinancial Asset

Arised from Simple Contracts a. Physical Assets
▪ Inventories
a. Cash it represents the medium of exchange therefore
▪ Biological Assets
the basis of measurement and recognition of transaction ▪ PPE
in financial statements ▪ Investment properties
▪ Cash in hand/ bank, currency b. Intangible Assets
b. Equity instrument of another entity Reason: Control of these assets
▪ Investment in equity securities generates inflow of cash/financial assets
BUT does not give rise to present a right
c. A contractual right
to receive a cash/financial asset.
▪ To receive cash/ other financial asset from
▪ Copyright
another entity
▪ Patents
Ex. Investment in debt instruments
▪ Trademarks
▪ To exchange financial asset/liability in favour to ▪ Gold bullion, although deposited in a
the other entity bank, cuz it’s a commodity
Ex. financial assets c. Prepaid expenses
▪ Other examples Reason: The future economic benefit is
Trade accounts, accounts/notes/loans receivables
the receipt of goods and services rather
d. A contract that will or may be settled in the entity’s than the right to receive cash or other
own equity instruments financial asset
▪ A non-derivative- the entity is obliged to receive a
d. Current and deferred tax assets
variable number of the entity’s own equity
Reason: Not contractual. Izza like a
instrument
mandatory with gov
▪ A *derivative settled other by the exchange of
cash/ financial assets for a fixed number of the e. Right of use asset or leased asset
entity’s own equity instruments. Reason: Control does not give rise to
o for this purpose the entity’s own equity present right to receive cash/financial
instruments do not include **puttable asset
financial instruments.

Stuffs I don’t know adsdfghk btw YUNG MGA NAKAGREY , di sila mahalaga sinama lang ni Mam
*A derivative is a financial instrument whose value changes in relation to changes in a variable, such as an interest rate, commodity price, credit rating, or
foreign exchange rate. It requires either a small or no initial investment, and is settled at a future date.
**a puttable instrument is a financial instrument or a right that gives the holder the right to put the instrument or right back to the issuer for cash or another
financial asset. The amount payable upon redemption is determined based on an index or other item that has the potential to increase and decrease.
 Financial Liability
a. Contractual Obligation
▪ To deliver cash/financial asset to another entity
▪ Exchange financial assets/liabilities with another
entity favourable to that entity
Ex. Derivative financial liabilities
b. Contract settles in the entity’s own equity
instruments
▪ A non-derivative- the entity is obliged to receive a
variable number of the entity’s own equity instrument
▪ A *derivative settled other by the exchange of cash/
financial assets for a fixed number of the entity’s own
equity instruments. Ex: Some derivatives on own equity
instruments
o SAME with financial assets
The DIFFERENCE lies on the perspective of the parties
to the contract
Financial Asset- defined by at the holder’s perspective
Financial Liability- defined at the issuer’s perspective
Examples compiled
▪ Trade Accounts/Accounts/Notes/Loans/Bonds
Payable
▪ Other debt instruments issued by the
entity(commercial paper)
▪ Derivative financial liabilities
▪ Obligations to deliver own shares worth a fixed
amount of cash
▪ Some derivatives on own equity instruments
▪ Redeemable preference shares
Equity Instrument
- Any contract that evidences a residual interest
in the assets after deducting all of liabilities
- Ordinary shares and preference shares
Examples
- Non-puttable ordinary shares
- Some puttable instruments (…wat)
- Some instruments that impose on the entity an
obligation to deliver to other party a pro rata
share of the net assets of the entity only on
liquidation (wow wordyyy)
- Unredeemable preference shared
-Issued share warrants and options
Pag may share warrant you have opportunity to
buy my share
NON FINANCIAL LIABILITY
a. Deferred revenue
b. Warranty liability-
Reason: The outflow of economic
benefits is the delivery of
goods and services rather
than a contractual obligation
to pay cash or another
asset.
c. Current and deferred tax liabilities-
Reason: Not contractual
▪ Income tax payable
d. Constructive obligations
Reason: Not contractual
WHY: Constructive obligation is an
obligation to pay that arises out of conduct
and intent rather than a contract. (e.g.
constructive obligations to clean up
contaminated land or restore facilities)
No designated payee, just announced in
public ,records liability but not a financial
liability
Preference Shares- Equity Instrument
BUT!!
Preference shares with mandatory
redemption date, or are redeemable at
the option of the holder, is in
substance, a FINANCIAL LIABILITY.
So, reported under liabilities? YUP.
How about the dividends paid? Record
them as finance costs. Dahil in substance
yan ay financial liability
 Financial Asset (if potentially favorable/inflow)
Derivatives
Financial Liability (if potentially unfavorable/outflow)

Derivatives Contract-
• base on underlying asset that varies
• Interest rate swap

Example: Company A loaned from Bank A P1M per arrangement with a fixed rate of 10%. Variable
Interest per year is based on the market rate hence the interest payment changes and is not fixed.
Variable rate that year was 12%.
Company A feared that the market rate will increase in the following years. In order to mitigate/ limit the
risk, Comp A entered a derivative contract with Bank B.
Company A pays Bank B on a fixed rate base on the principal on a bank a loan from Bank A P100 000
Bank B, in return, will pay you base on the variable interest. P120 000
This arrangement will give Company A chance to pay on a fixed rate fix than on a variable rate.
What if 7% lang pala yung market rate? Edi sadt. Lugi si Comp A. Whyski? Look down, look down~
Market rate 12% 7%
What Bank B gives you, that you give to Bank A 120 000 70 000
What you pay Bank B (fixed rate of 10%) (Interest Expense) 100 000 100 000
Inflow/ Outflow 20 000 (30 000)
Whatever way, the interest expense is still the same. The difference is on the inflow and outflow.
If inflow= financial asset
If outflow= financial liability.
Derivative is not an account title it may be but there are others like “Collectible from Bank B”
There’s disclosure in the derivative contract.

Bank Overdraft- Current Liability

Account Bank Amt Presentation Watnow?
Acct #1 Bank A P2000 Cash
Can’t offset to A cuz not same
Acct #2 Bank B (1000) Current Liabilities
party
Acct #3 Bank C 7000 ➔ P2000 Cash Can offset cuz same party
Acct #4 Bank C (5000)
Company DID
Cash
NOT INTEND to
Management
have have bank CASH
Tool overdraft
Bank
Purpose
Overdraft
Company
Financing
purposes
INTENDED to have LIABILITY
bank overdraft
 CHAPTER 6
Cash and Cash Equivalent
Cash Cash Equivalents
Currencies and Cash in bank Working funds/ Cash funds- • Three-month BSP
Coins (deposited in bank) Cash set aside for certain treasury bill
purposes • Three-year treasury bill
Petty Cash Fund Cash on hand purchased 3 months
(simple expenses) (undeposited collections) • Petty Cash Fund before date of maturity
• Change Fund • Three-month time
Negotiable Undeposited Negotiable • Payroll Fund
Instruments Instruments deposit
• Dividend Fund • Three-month money
Time deposits Demand deposits • Tax Fund market instrument/
• Interest Fund commercial paper
Foreign Currencies Bank drafts
Money Orders Checks

Cash
Unrestricted and immediately available for CASH
use in in current operations
Cash Items
If legally restricted or for use other than for Other Non-Current
current operations financial Assets

Current Asets Ex. Payroll Fund,

If purpose is operation, or for
Part of Cash and Cash Dividend Fund, Interest
current liability
Cash Fund Equivalent Fund
Cash Set Aside for
certain purposes
If purpose is Long term obligation Ex. Cash set aside for
Other Non-Current
(Under Long-term Investments) payment for bonds
financial Assets
payable (sinking funds)

Preference share redemption funds- sometimes company set asides cash fund for redeemable
preference shares
CASH IS MEASURED AT FAIR VALUE!
Match obligation to the asset
If liability is a long term loan, the cash fund is a non-current asset
If the liability becomes current, so does assets.
If bonds payable becomes current, the cash fund (sinking fund) for this will become current too.
If set aside for acquisition of long term asset such as PPE
Ex Jan 1 Set a cash fund for an acquisition of plant to be paid after 2 years. 2 years flew by,
tomorrow the company will disburse the cash fund for the said acquisition of PPE. At that time, it is
till, NON-CURRENT. No matter when you disburse.?
 Foreign Currency Deposit
If Foreign currency deposit, translate to Philippine peso
What exchange rate to use?
☒Average
☒Exchange rate on transaction date
✓ Exchange rate at financial position date(as of dec 31,2019)

Bankruptcy
You have an account in a bank and recently that bank occurred bankruptcy. Write down the value of
the cash to the value of the cash you’ll get when the bank settles.
Ex. You have P1M on Bank A and Bank A went bankrupt. Bank A can only give P500 000 hence you
write down 500 000.
Usually while you don’t have the settlement yet you remove Cash in Bank and put Receivable from
Bank. When you have the settlement. Debit losses and cash credit Receivable from Bank.
Compensating balance
-Cash amount not immediately accessible by the owner and maintained as a minimum amount of cash
on deposit in pursuant to borrowing arrangements with lender blah blah
-When you loan from the bank and there are some balances left
-Still your money but can’t withdraw
Ex. You loaned P1’000’000 but in order to make it possible, you have to leave P100 000 to the bank
Cash on hand- P900 000
Cash in bank- P100’000
Legally restricted Formal agreement CASH
Compensating Balance
Not legally
restricted
Informal/ verbal LIABILITY

CHECKS
Undelivered check- definition
Entry : nagissue ng check If undelivered by the end of the period
A/P or Expense xx Cash in Bank xx
Cash in Bank xx A/P or Expense x

Post-dated Check- definition

If
nasayo – PDC received, cash na if dumating ang date
If binigay- same thing
Stale Check- Took too long to encash; In practice if the check is not encashed within 6months = stale
6 months not the standard but used in practice;
Other banks won’t accept after 6 mon but some are ok
Entry Jan. 1, 2019 Sept 1, 2019- adj entry
AP xx Cash in Bank xx
CIB xx *A/P/Other Income/ Miscell. Income xx
A/P if rereestablish ang AP ,if not,Income(kadalasan if immaterial low chance na kukunin pa ni payee)
August 1, 2019

Cash shortage/ overage- Done after cash count

Shortage Overage
Cash Short or Over xx PCF xx
PCF xx Cash Short or Over xx
# #
If nadetermine na kasalanan ni Cashier Determined who really owns it
Receivable from Cashier xx Cash Short or Over xx
Cash short or Over xx Payable to cashier xx
# #
Cannot determine who’s responsible Can’t determine who owns it
Loss to Cash Shortage xx Cash short or Over xx
Cash Short or Over xx Miscellanous Income xx
# #
Cash mas mataas ang control kaysa sa ibang asset kasi super liquid
Imprest System- magagamit lang account na pcf if replenish, adjust, increase/decrease amount
Fluctuating System- kada pasok labas may account yung PCF
Imprest System Fluctuating System
Year 1
January: Established Petty Cash Fund P10 000
Jan Petty Cash Fund P10000 Jan Petty Cash Fund P10 000
Cash In Bank P 10000 Cash in Bank P10 000
# #
February: P2000 expenses paid from PCF
Feb No entry Feb Expenses 2 000
PCF 2000
#
March: Replenished PCF
Mar Expenses 2000 PCF 2000
Cash in Bank 2000 Cash in Bank 2000
# #
Note: Balance of PCF is P10 000

April: Expense of 3k
Apr No Entry April Expenses 3000
Cash in Bank 3000
#
No replenishment occurred from April to December
In the Financial Statement,the balance of the Petty Cash Fund should be P7 000
Hence, we should adjust to make the balance P7 000
Dec Expense 3000 No adjustment
PCF 3000 because always
# updated

Year 2
Reverse entry No reversing entry
Jan PCF 3 000
Expense 3 000
#

No need to memorize entry, for logic purpose only

August 1, 2019

February: Replenish PCF

Feb Expense 3000 Feb PCF 3000
PCF 3000 Cash in Bank 3000
# #
Note: Balance of PCF is okay, na-offset na yung
expenses
March : Increase balance of PCF by 5 000
Mar PCF 5000 Mar PCF 5000
Cash in Bank 5000 Cash in Bank 5000
# #
Note: Balance of Petty Cash Fund is now P15 000

Cash equivalents
Cash equivalents- short term highly liquid investment that so near their maturity that there is an
insignificant risk that value will change due to changes in interest rates.
Why invest on CE? If there is an excess cash there is an opportunity to create additional income.
To be a CE it must be ACQUIRED 3 months before maturity. (Not standard, but commonly in practice)
Ex. An investment was acquired 1 year ago but is due in 2 months. NOT a cash equivalent but classifies
as current asset. What matters is the ACQUISITION DATE.
Receivables
Classification in according to source
Trade- result from normal operating activities such as sale of goods/ services; usually current
Non-Trade- transactions other than the sale of goods and services in the normal course of bizness

FV
FV

Mam’s logic on “Effective Interest> Nominal Rate = Discount”

Non-Interest bearing note is always discount. It has no Nominal Rate only effective Rate.

No need to memorize entry, for logic purpose only

August 1, 2019

Trade and Cash Discount

Trade Discount- bulk-not reflected on account; already deducted; usually current
Cash Discount
Gross Method- Discount not deducted, insert Sales disc if naabutan discount period
Net Method- Discount already deducted, Sales Disc Forfeited if di naabutan (oci to)

Cash Discount- down payment; payment within the discount period, 2/10, n/30
Freight?
Freight what Normally Responsible Normal ugh
FOB Shipping Point Buyer Freight Collect
FOB Destination Seller Freight Prepaid
Freight collect – buyer sabi ni Mam pwede na ibawas sa AR yung binayad ni buyer wag na gumawa ng
ibang account deb freight out? Credit AR. Sorry guys di ko to nagets
Doubtful Accounts Expense
2 Methods
A. Direct Write Off Method – Accounts receivable is removed completely
B. Allowance Method- has an allowance account
Bad Debts Expense xx
Allowance for Bad Debts xx
3 types/ methods or something
1. Aging- required balance of allowance,
ending bal of Allowance for Doubtful Account is reflected in the financial statements
2. % of AR- compute bad debts exp for that year
3. % of Sales- bad debts is computed base on sales
Example, Accounts Receivable is P100 000, Sales is P2M
Aging % of AR % of Sales
Disaggregate the The percentage for the Allowance Ex. 2% of sales are the bad debts
P100k AR for bad debts is 10%. You already
Sales x 2%= 2M x 2%= 40 000
have a balance of 2000. The
Classify the old
correct balance of the All for BD is Bad debts expense 40 000
accounts not yet
(100 000 AR x 10%) P10 000.
collected. The Allowance for bad debts 40 000
Kulang ng P8000
older the accounts
are, the higher is Adjusting Entry
the likelihood of
Bad debts Expense 8000
uncollectibility.
Allowance for bad debts 8000
Rip grammar

No need to memorize entry, for logic purpose only

August 1, 2019

Aging A% of AR % of Sales
✓ AR NRV ✓ Matching Principle
 Matching Principle  AR NRV
No issue on the NRV since there’s an adjustment every year No issue on the matching principle
end base sa percentage of AR or Aging. because whenever there’s sales
you also recognize Bad Debts
Under Aging and % of AR, Bad debts are not recognized,
Expense
since uncollectibility is not yet measured especially on the
first year of the business. There exists an income but the But in failed in NRV since Sales is
related expense is not recognized in that year but on the multipled only without considering
subsequent years where the Account Receivable will age. the ending balance of the Accounts
This is the part where the Matching Principle is violated. Receivable if collectible or not.
Solution: Mix – Make an entry base on % of sales but from time to time make also an entry base
on aging and % of AR to meet the NRV and Matching Principle.

Recovery Write Off

Direct Method Allowance Method
Write Down Bad debts Expense xx Allowance for Doubtful Accounts xx
Acc. Receivable xx Accounts Receivable xx
# #

Recovery Accounts Receivable xx Accounts Receivable xx

Bad Debts Expense xx Allowance for bad debts xx
# #
In Direct Method there may exist other income since some accounts are recovered the year following
its write off. But rare, since there would be no write off in the first place if the account is not worthless
Expected Credit Loss Model (read pg 159)
Expected Credit Loss Model is to reflect the general pattern of deterioration or improvement in the
credit quality of financial instrument.
Credit loss- difference between all contractual cash flows and cash flows that the entity expects to
receive.
Once, accounts, such as loans and notes, are realized, know also how much is uncollectible along with
the recognition of the asset by making a model.
Example, Comp A sold stuffs worth 1M to A in return a promissory note; Notes receivable; long term
The credit department is the one who grants if the company will let A have a debt based on his history
or credit standing. They may also state how many years is okay. They also forecast the uncollectability
of A base on his credit risk. Unlike Aging, % of Ar, % of Sales, forecasting is much more complicated.
There is no single model or equation for all company or department or whatsoever.

No need to memorize entry, for logic purpose only

August 1, 2019

Receivable Financing – meaning, sold or used as collateral KAY VALIX DAW

1. Pledging- all AR serves as collateral
- disclose only is needed “AR at pledge’
- Entry is still the same, no need for customers to know if it’s their AR that was pledge.
-Generally all of the company’s AR is pledge, no specific AR is necessary to disclose.
- Basta, ginawang collateral yung AR ng customer mo. Di alam ng customer mon a
ginawa mo yun kasi sa pledging, general, hindi specific kung aling AR yung ginamit.
2. Assignment- mas Discloses also
a.Notification basis- ipapapalam mo kay customer ikaw na magbayad sa bank
- b. Non notification basis – di mo sasabihin kay customer na nakaasssign yung acacount
niya, nakakcoollecta ako ang magreremit ako kay bank
When these 2 AR Assigned If nadistinguish mo/ tapos na ung assignment, in this case
Company still owns AR, collateral lang siya
Cash xx
Notes Payable xx Accounts Receivable xx
Interest Payable xx AR-assigned xx
# #

3. Factoring- binebenta na yung AR

a. Casual Factoring- outright sale, AR sold, Cash xx
one time transfer Loss on Factoring xx
b. Continuing agreement- continuous ownership AR xx
collection by bunk; give commission #

4. Discounting
a. w/o recourse- no secondary liability
b. w/ recourse- pwede ibalik in case hindi nabayaran; secured borrowing/ conditional sale
.Secured Borrowing- nanghiram ka ng pera Conditional Sale- since nagsale recognize
so expense no gain or loss loss
Cash xx Cash xx
Interest Exp xx Loss on NR discount xx
NR xx NR xx
Interest Income xx Interest Income xx
# #

Recognition and measurement of Short Term Notes (Read pg 161)

When will there be discount or premium
A. Those bearing interest on face amount of note- no premium, no discount
B. Non- interest bearing note - discounts
C. Interest-bearing note w/unrealistic interest rate - compare ER and ER which is higher;
premium or discount
Read the others

No need to memorize entry, for logic purpose only

August 1, 2019

Discounting (ithink)
PV of Ordinary Annuity= PV of 1=
Examples
1. Non-interest bearing note 1M payable in 10 equal annual installment; prevailing rate= 7%
1−(1+0.07)−10
Used PV of ordinary annuity 𝑥 100 000 = 702, 358
0.07

Cash payment sampung beses 100 000 in 10 years

2. Jan 1, 2019 NR 5% 500 000(facevalue) payable on Dec. 31, 2023, EI=10%
Two stuffs to pay :
1. Principal payment: 500,000 payable in Dec. 21,2023 one time payment
(1 + .10)−5 ∗ 500 000 = 310,460.66
2. Interest payment: Yearly 25,000 (from 500 000x 5%) interest for 5 years; to be discounted
1−(1+0.10)−5
∗ 25 000 = 94, 769. 67
0.10

3. 1M face value 10% payable in 5 installments, hence 200 000 [ 1M/ 5 instalments] every year
We don’t use ordinary annuity since payment is not the same, so discounted individually.
Years Pay Interest in cash (Balance * 10% Total * (1 + 𝑖)−𝑛 Answer

Y1 200 000 100 000 [1M x .10] 300 000 (1 + .10)−1

80 000
Y2 200 000 280 000 (1 + .10)−2
[ 800k *10% since 200k is already paid ]

Y3 200 000 60 000 260 000 (1 + .10)−3

Y4 200 000 40 000 240 000 (1 + .10)−4

Y5 200 000 20000 220 000 (1 + .10)−5

Same with above except 1st payment is jan 1 2019

Years Pay Interest in Cash Total * (1 + 𝑖)−𝑛 Answer

Y0 200 000 - 200 000

Y1 200 000 80 000 280 000 (1 + .10)−1

Y2 200 000 60 000 260 000 (1 + .10)−2

Y3 200 000 40 000 240 000 (1 + .10)−3

Y4 200 000 20 000 220 000 (1 + .10)−4

Loans receivable impairment and uncollectibility -nawawala

No need to memorize entry, for logic purpose only

August 1, 2019

CHAPTER 7
Investment in Equity/ Debt Securities
Derivatives and Special Purpose Funds
Investments
-can be financial or non-financial like PPE
-assets held by an entity for:
1. Accretion of wealth- invest to receive dividends & interest income
2. Capital appreciation- investment overtime Cash surrender
3. Ownership Control value- amount u
4. Meeting business requirements- ex. Sinking funds get when you
cancel insurance
5. Protection- insurance; cash surrender value
Investment in Debt and Equity Securities
When you invest in ordinary shares (equity securities) its material to see the percentage of ownership
cuz there’s voting share, the more ordinary shares you the more voting rights.
% of Ownership <20 % 20%-50% >50 %
Level of influence Little /none powei nvested for 1&2 Significant Influence Control
Accounting Method FV Method Equity Method Consolidated FS
Classification of FVPL and FV OCI Investment in Associate Investment in
Investment Subsidiary
Applicable PFRS PFRS 9, PAS 32, PAS 39 PAS 28 PAS 10

Transaction Cost
-directly attributable to the acquisition, issue or disposal of a financial asset or financial liability
-general rule is to capitalize except fair value in profit or loss
Includes
• Fees and commissions paid to agents • Transfer taxes and duties
(including employees acting as • SEC fee
agents), advisers, brokers, dealers • PSE transaction fee
• Levies by regulatory agencies • Document Stamp
• Security exchanges

Excludes (expenses you still incur whether you bought the securities or not)
• Debt premiums/discounts
• Financing costs
• Internal administrative or holding costs

SPPI (Sole payments of principal and interest)

Fair Value option (FV Option)- initial recognition, ibig sbihn pag na-acquire lang pwede mag fair value.
Pag initial recognition, may right na irrevocable election na i-measure ang debt securities at fair value at
profit or loss,

FVPL usually current ; FV OCI usually non-current

On Fair Value changes there exists an account Unrealized Gain/ Loss if recognized

No need to memorize entry, for logic purpose only

 Inv in Sec Business Model Transact Costs Fair Value changes / Upon disposal Reclassification

Investment in Debt Securities

1. Amortized Collect payments SPPI ONLY Capitalized Ignore fair value changes since you make an amortization table Ok
Cost
2. FV OCI Collect SPPI AND Sale Capitalized Recognize ng fair value changes accumulated to OCI, Ok
August 1, 2019

Naiipon sa OCI, hindi sinasara sa P/L kaya kada taon lumalaki siya

No need to memorize entry, for logic purpose only

Upon disposal: the accumulated UG/L can be transferred to P/L

3. FV PL 1. Held for trading Expense Recognize fair value changes to P/L, Ok

2. Qualifications of AC and papasolk sa p and l per year nasasara sa retained earnings Except FV
FVOCI are not met. (hence FV OPTION
PL is the residual(natitirang) (irrevocable/ no
choice) reclassification)
3. Qualifies #1 and #2 but chose
FVOption
Investment in Equity Securities
1. FV OCI 1.Not held for trading and Capitalized Upon disposal No
2 irrevocable election to measure OCI- no transfer to PL; directly transfer to retained earnings reclassification
at FVOCI
2. FV PL 1. Held for trading- initial recog Expensed Sara mo sa P/L No
2.Residual (natirang choice) reclassification
August 1, 2019

Reclassification
When: if there’s change in business model.
“FIRST DAY SUBSEQUENT TO
PERIOD OF BUSINESS MODEL CHANGE”
Applies prospectively- from current period
onwards
Standard is strict about this because changing business model is rare and hindi basta basta
• Change occurred February 2018. Investment in ES-FVAC to Investment in ES- FVOCI

Cases for Investment in Equity Securities

On 1/1/17
1. Purchased marketable equitable securities P1M, commissions paid amt to P100 000
2. 12/31/17 securities have a market value of P1300 000
3. 12.31.18 market value decreased to P1200 000
4. 1.1.19 All the securities were sold for 1400 000
Equity Securities
FVPL FVOCI
Inv in ES - FVPL P1 000 000 Inv in ES- FVOCI 1100 000
Commission Expense 100 000 Cash 1100 000
Cash P1100 000
Inv in ES FVPL 300 000 Inv in ES FV OCI 200 000
Unrealized gain- FVPL 300 000 UGL- FVOCI- 200 000
Unrealized Loss- FVPL 100 000 UGL-FVOCI 100000
Inv in Sec- FVPL 100 000 INV in ESFVOCI 100 000
Cash 1400000 Cash 1400 000
Inv in Sect- FVPL 1200 000 Inv in ES-FVOCI 1200 000
Gain on Sale of Inv 200 000 UGL- FVOCI 100 000
Retained Earning 100 000

*If not compounded

Cash 400000
Inv in ES 200 000
Retained Earnings 200 000

Retained Earnings 100 000

UGL-FVOCI 100000

FVOCI “UG/L issue”

Comprehensive Income SFP
P/L *mga ugl sa fvpl ditto A
lang di mapupunta sa oci L
E
OCI 200 000 OCI 200 (fvoci 2nd year 100
(FVOCI 100 000decrease) 000 cumulative

No need to memorize entry, for logic purpose only

August 1, 2019

Case: ES FVOCI
1/1/18 Inv FVOCI 5000 000
1/1/18 5 000 000 Cash 5 000 000
12/31/18 5200 000
12/31/2019 4500 000 12/31/18 Inv FVOCI 200 000
1/1/2020 Sold for 5 200 000 UG/L- OCI 200 000

SCI 2018 2019 2020 SFP 2018 2019 2020

P/L A Inv 5.2 M

OCI200 000 E-OCI 200 00

12/ 31/ 2019

UGL OCI 700 000
Inv in ES FVOCI 700 000

SCI 2018 2019 2020 SFP 2018 2019 2020

P/L A Inv 5.2 M

OCI200 000 (700 000) E-OCI 200 00 (500 000)*

*Y1 200 000 – Y2 700 000= (500 000)

1/1/20
Cash 5200 000
Retained Earning 200 000
Inv ES FVOCI 4.5 M
UG/L OCI 500 000

What if it was debt securities, what is the entry on Jan. 1, 2020

Cash
Gain
Investment
UG/L
Upon disposal lang pwedeng maglagay ng gain, one time lang ang gain

No need to memorize entry, for logic purpose only

August 1, 2019

Case for Investment in Debt Securities

Purchase P1M face value, 8% bond , @14 the entity
Also paid P25 540, commissions to an agent, interest is payable semi-annually
Principal is payable in 2 years
Fair value 12/ 31/ 18 P1100 000
Sold 6/30/19 950 000
EI 10%

Debt Securities
FVPL FVAC FVOCI
Inv in ds FVPL 940 000 Inv in DS -AC 964540 Inv in DS- FVOCI 964540
Commissions 24540 Cash 964540 Cash 964540
Cash 964540
Cash 40 000 Cash 40 000 Cash 40 000
Interest Income 40 000 Inv in DS- AC 8227 Inv in DS- AC 8227
Int. Income/ 48227 Int. Income/ 48227
Cash 40 000 Cash 40 000 Cash 40 000
Interest Income 40 000 Inv 8638 Inv 8638
Int. Income 48638 Int. Income 48638
Inv in ES-FVPL 160 000
UG/L FVPL 160 000 Inv in Debt Sec 118550
*UGL napunta sa P/L UGL 118550
Sa p/l ung income , UGL sa oci
Sfp Asset inv 11M
EQ
Oci -18550
Cash 40 000 Cash 40 000 ?
Int Income 40 Inv 9070
000 Inc 49070
CA= 990520 Cash 950 000
Cash 950 000 Cash 950 000 UGL oci 118550
Loss on Sale 150 000 Loss on Sale 40520 (dalhin sa Loss on ? 31450 (pwede ilagay
Inv in ES-FVPl 1100 P/L) sa RE)
000 Inv in DS AC 990520 Inv DS FV OCI 1100 000

No need to memorize entry, for logic purpose only

August 1, 2019

Other Accounting issues relative to investments in Equity Securities

DIVIDENDS
Dates when it comes to dividends
• Date of declaration
-record income on this date cuz you earned the right to receive dividend
- entry is dividends receivable until paid
• Date of record
• Date of payment
Classes of dividends
1. Cash dividend- measured at dividend income
2. Stock dividend/ share dividend- no entry, just note, memo
3. Property dividend- measured at dividend income
not necessarily PPE, what’s given is the share of another company
Property is measured at Fair Value
Entry: debit Investment in equity securityB ; credit Dividend Income
4. Liquidating dividend return of investment – binabalik lang sayo ung original investment
Different with return ON investments cuz that means income
Ex. Shares receive in lieu of cash dividend
Nabigay Original
Income
FV of shares received; Measure share received using the cash dividend supposed to be received
2. Cash received in lieu of stock dividend
Nabigay original
Not income
As if stock dividend is received and subsequently sold

1M; 100 000 shares= per share P10

Receive 20% Cash 170 000
100 000 sh Inv in Equity Sec 160 000
+20 000 sh Gain on Sale 9400
120 000 shares P8.33
(20 000)
166666

“Trading”
-Purpose of selling If no FV, measure at COST
-Portfolio goal is to gain short term profits
Derivatives- measures at FV Quoted price of bonds
@101 Bonds 1M = 1010 000
Fair Value @98 shares P98/share
- Amt on sale of asset
Test for impairment for
Hierchy Debt Sec @Amortized Cost
1. Identical asset- active market Debt Sec @FVOCI
2. Similar asset-active market No test for FVP/L ES DS changes in
3. identical similar market- inactive market fair value P/L and FVOCI

No need to memorize entry, for logic purpose only

August 1, 2019

Stock Right
Represents the pre-emptive of existing shareholders
Investors and their Ownership
for new issue of shares share interest
Existing Shares
Ex. There exists 100 000 shares Investor A
A- 20 000 sh 20%
See →
Now, the company wants to issue another 100 000 B- 40 000 sh 40 %
100 000 new shares for investment. These shares
new shares weren’t given to investors A,B and C- 40 000 sh 40%
C but to D. The ownership interest will change.

Existing Shares Investors and their share Ownership

A- 20 000 sh 10%

100 000
B- 40 000 sh 20%
+100 000
= 200 000shares C- 40 000 sh 20%

D- 100 000 sh 50%

So, usually in practice , (I think due to pre-emptive right rin), new shares are offered first to A, B and C
but this is optional. A, B, C has the option to exercise right, sell rights or wait for expiration.
Usually, 1 share, 1 right. Ex. Investor A 20 000 shares = 20 000 rights
But not neessarli, 20 000 right is right to buy 20 000 shares
If company says 5 right for 1 share, then issue 20 000 new shares

-Generally if you have stock price, exercise price or strike price) < market price
Strike price- if A buys using right mas mababa sa market rate, if ito binenta sa labas @ 200 pag sila
bumili bibilihin nila right 150 so less than market valeue , dun nag aarrise yung value ng stock rights
kasi may advantage yung may hawak ng rights kasi mabibigay nila share at less than market value. Ex
strike price mas Malaki sa market value ieexercise mob a yung right no kasi lugi ka, kaya karaniwan
strike price is < market price
Stock rights – pwede benta

Not specify in standard on how to account stock rights

In practice its either
a. memo entry- wala naman talagang nareceive na value, kasi ex hinintay na magexpire yung rights
may binayaran ka ba may binili ka ba?
b. Accounted for separately- make entry to recognize value of rights
entry debit stock rights (value existing investment, sa baba)
cred. Inv in ES (how much)

No need to memorize entry, for logic purpose only

August 1, 2019

1. FV of Stock Rights ex. P10 per right

2. Theoretical value of stock rights- compute based on given info
Strike Price < Market Price
Stock price issue merong announcement tsaka palang iisue yung certificate,pwede mo plang
mabenta ng hiwalay yung stock right if may certificate, but if wala pang certi nakakabit yung stock right
sa share, kasi di sila mahiwalay.
From the date the right is announced until it is issued, the share and the right are NOT separable,
share is described as right- on if nagbenta ka ng share nakakabit agad yung right, like di
nahiwalay sa dvidends, dividends-on?
After the certificate or right is received and up to the time it expires, the share and the right can be sold
separately.
But a share sold separately from an effective stock right is sold ex-right like dividend if di na
nakapatong sa share- ex-dividend

Ex, Rights On (no certi)

Market value of shares P210 na sright on, so ang market price equal to isang share isang right
Strike price= @150 at dapat daw magsuko ka ng 5 rights per 1 share so if gagamitin mo yung rights

daoat may 5 ka at 150 pesos para makabili ka ng isa

No fair value so compute mo nalang yung value base sa information

𝑀𝑉(𝑟𝑖𝑔ℎ𝑡𝑠−𝑜𝑛)−𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒
If rights on = #𝑆𝑡𝑜𝑐𝑘 𝑅𝑖𝑔ℎ𝑡𝑠+1
210−150
If Ex-right=
= 5+1 = 𝑀𝑉(𝑟𝑖𝑔ℎ𝑡−𝑜𝑛)−𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒
#𝑆𝑅
𝑃10/𝑟𝑖𝑔ℎ𝑡
210−150
20 000 rights received so 10 ∗ = 𝑃12/𝑟𝑖𝑔ℎ𝑡
5
20 000 = 200 000 12 ∗ 20 000 = 240 000
Stock Rights 200 000 (binayad mo)
Inv in Equity Securities 200 000 Stock Right 240 000
Inv in ES 240 000
So if eexercise mon a credit mol ang to ,cash, then debit inv
If binenta, credit mol ang to, debit mol ang cash then recognize gain or loss, basta ito
value ng stock rights, if not exercised, stock rights if accounted for separately
#3 mali, hindi talaga intention na magbenta, dapat nakalagay maturity date kung klan marereceive yug
cash flow, investment in bonds install ment hwalay current and non
If lump sum non current
Interest receivable, current lagi

No need to memorize entry, for logic purpose only

 August 1, 2019

Investment in Associate
Significant influence- power to participate in the financial & operating decisions of the investee but not
control or joint control
- If 20%- 50% ownership perentage BUT
- Even if the % of ownership isn’t 20%-50% there still exist a significant influence by the
investor evidenced by
• Representation on the BOD or equivalent governing body of the investee
• Participation in the policy-making process
• Material transactions between the investors and the investee
• Interchange of managerial personnel or
• Provision of essential technical information

Equity Method
- Investment in Associate is initially recorded @cost
- Share in profit or loss is an addition/deduction to the investment account
- Dividends received are not income
- Retained Earnings

1/1/18 Purchased 20 000 shares of 100 000 ordinary shares @200/sh

Hence 20 000/ 100 000 = 20% ownership; also 20 000 @ 200 = 4 000 000
12/31/18 Net Income of Associates P5M
Associates paid cash dividends totalling P2.5M
12/31/19 Net Loss of P1M
1/1/18 Investment in Associate 4000 000
Cash 4 000 000
12/31/18 Investment in Associate 1000 000
Investment in Income 1 000 000
Why? P5 000 000 x 20%= 1 000 000
Cash 500 000
Investment in Associate 500 000
12/31/19 Loss on Investment 200 000
Investment in Associate 200 000

In 2018 Investment in Associate= P4500 000

P/L OCI P1 000 000 Investment Income
In 2019 Investment in Associate= P4 300 000
If there was a revaluation surplus it goes to OCI and to P/L if sold
Investment in Associate 200 000
Revaluation Surplus- Associate 200 000

No need to memorize entry, for logic purpose only

August 1, 2019

ACQUISITION FORMULA
Acquisition Cost (value of associate) 4 000 000 What if 2 000 000
Carrying Amt Net Assets (15M*20%) (3 000 000) (3 000 000)
1 000 000 (1 000 000)
Undervalued: PPE (500 000*20%) (100 000) ( 100 000)
Goodwill 900 000 Gain (1100 000)

Goodwill- intangible assets

- no adjustment needed; nakapaloob na sa Investment in Associate (4M)
Gain- needs adjustments
Adj Entry Investment in Associate 1 100 000
Investment Income 1 100 000

Case 2
1/1/18 Purchased 20 000 shares of the 100 000 of ordinary share for P5M
• Carrying Amount of net assets of the asssoc P20M
• Carrying Amount of net assets of the assoc is equal to the fair value except:
Undervalued by (difference of CV and FV) note
PPE 2 000 000 Remaining life 5 years
Inventory 500 000 All sold

• Net Income of Assoc P5M

Answer
1/1/18 Investment in Associate 5 000 000
Cash 5 000 000

ACQUISITION FORMULA
Acquisition Cost (value of associate) 5 000 000
Carrying Amt Net Assets (10M*20%) (4 000 000) PPE 400 000/ 5 years= 80 000
Excess of cost over carrying amt 1 000 000 Inventory Cost of Sale = 100 000
Undervalued: PPE (2M*20%) (400 000) 180 000
Inventory (500k*20%) (100 000)
Goodwill 500 000

12/31/18 Investment in Associate 1 000 000

Investment Income 1 000 000

Investment Income 180 000

Investment in Associate 180 000

No need to memorize entry, for logic purpose only

August 1, 2019

Case 3
25 % Owned
Net income of Associate
Y1 P100 000
Y2 P800 000
Y3 P1 200 000
On Year 1, the associate sold the following items to the investor

Cost Sold note Gain or Loss

Inventory 300 000 400 000 Sold on Year 2 100 000
Machinery 700 000 1 000 000 Remaining life 3 years sold to 300 000
investor on?—of 1st year
Land 6 000 5 500 000 Sold on Year 3 (500 000)
000

Y1 Y2 Y3
Share in Net Income x.25 250 000 200 000 300 000
Adjustment: For Inventory (25 000) 25000
Machinery (75 000)
25 000 25 000 25 000
Land 125 000 (125 000)
300 00 250 000 200 000

1 000 000 Presentation

Net Loss (200 000) nil or zero
800 000
Loss (1 200 000)
Depart 5-8
( 400 000)

Income for ordinary shares of owner

Preference shares
Delivered
Non-cumulative preference shares= whether delivered or not
Y1 1 000 00

No need to memorize entry, for logic purpose only

August 1, 2019

(100 000)
900 000 * .25

Questions:
1. Dividends is recognized as income
a. date of payment
b. date of record
c. date of declaration

2. The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participant at measurement date
a. historical cost
b. fair value
c. acquisition cost

3. Cash amounts that are not immediately accessible by the owner and maintained as a minimum
amount of cash on deposit pursuant to borrowing arrangements with lender.
a. bank overdraft
b. cash equivalent
c. compensating balance
d. IOU
4. Dividends include, cash, property, stocks and rights (FALSE)
Dividends are cash, property, stocks and liquidating.
5. Statement 1: Change in fair value is ignored in investment in debt securities at amortized costs
TRUE
Statement 2: Transaction cost do not include internal administrative cost TRUE
6. S1 Under fv pl amortized cost is capitalized in debt securities (FALSE) should be expensed
S2 Amortized cost transaction cost is capitalized TRUE
7. All investment in eq sec and contracts on those instru with pfrs 9 must be measured at cost FALSE
(fairvalue dapat)

8. If note receivable is discounted without recourse

a. the contingent liability must be disclosed (without recourse no secondary liability)

No need to memorize entry, for logic purpose only

August 1, 2019

b. liability for notes receivable is credited (no liability, again)

c. notes receivable is credited
d. transaction should be accounted for secured borrowing

9. Which is not an ex of cash and cash equi

a. undeposited negotiable check
b. bank drafts
c. bank overdraft (current liability)
d. time deposit (but dapat acquired 3 month before maturity)

10. Inve in es and ind who owns 35% ownership interest in an entity has what level of influence
a. joint control
b. control
c. significant influence
d. None

11. Portion of an entity’s cash account that is compensatory balance is shown as non-current there the
related borrowing is current liability.
FALSE

12. Cash and cash equivalent has a specific standard specifically PFRS 9 and PAS 1 FALSE
Kasi walang specific standard for cash and cash equivalent ,
PFRS 9 is financial instrument
Pas 1 presentation of financial statement

13/ FVP/L in both equity and debt investment can be included in test of impairment
Test for impairment is only for fvoci ng debt and am ng debt

13. Physical asset and intangible assets and prepaid expenses are example of nonfinancial asset
TRUE

14. These are assets held by an entit for purposes of accretion of wealth through distribution of
dividends, interest or rentals or for capital appreciation or other benefits to be obtained

No need to memorize entry, for logic purpose only

August 1, 2019

a. Debt securities (for interest)

b. Loans receivabled
c. Investments

No need to memorize entry, for logic purpose only